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Innovation Under the Tradable Sulfur Dioxide Emission Permits Program in the U.S. Electricity Sector

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  • Burtraw, Dallas

    ()
    (Resources for the Future)

Abstract

The 1990 U.S. Clean Air Act Amendments (CAAA) instituted a national program in tradable sulfur dioxide (SO2) emission permits, referred to as "emission allowances," in the U.S. electricity sector. This paper provides a survey and assessment of the SO2 allowance trading program with a focus on the role of innovation. Over the last decade the cost of compliance has fallen dramatically compared with most expectations, and today the total cost of the program is 40– 140% lower than projections (depending on the timing of those projections and the counter-factual baseline considered). Marginal costs of reductions are less than one-half the cost considered in most analyses at the time the program was introduced. Innovation accounts for a large portion of these cost savings, but not as typically formulated in economic models of research and development (R&D) efforts to obtain patent discoveries. Innovation under the SO2 allowance trading program involves organizational innovation at the firm, market and regulatory level and process innovation by electricity generators and upstream fuel suppliers. An important portion of the cost reductions that are evident was already in the works prior to and independent of the program. Nonetheless, the allowance trading program deserves significant credit for providing the incentive and flexibility to accelerate and to fully realize exogenous technical changes that were occurring in the industry. This marks a significant departure from conventional approaches to environmental regulation, which would not be expected to capture these savings. The ongoing transition to restructuring of electricity markets and expanding competition in electricity generation complements the design of the SO2 allowance trading program by providing firms with full incentives to reduce costs of pollution control.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-00-38.

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Date of creation: 01 Sep 2000
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Handle: RePEc:rff:dpaper:dp-00-38

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  1. Fischer, Carolyn & Parry, Ian W. H. & Pizer, William A., 2003. "Instrument choice for environmental protection when technological innovation is endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 523-545, May.
  2. Bohi, Douglas R. & Burtraw, Dallas, 1992. "Utility investment behavior and the emission trading market," Resources and Energy, Elsevier, vol. 14(1-2), pages 129-153, April.
  3. Richard G. Newell & Adam B. Jaffe & Robert N. Stavins, 1999. "The Induced Innovation Hypothesis And Energy-Saving Technological Change," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 941-975, August.
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  5. Burtraw, Dallas & Lile, Ron, 1998. "State-Level Policies and Regulatory Guidance for Compliance in the Early Years of the SO2 Emission Allowance Trading Program," Discussion Papers dp-98-35, Resources For the Future.
  6. Kaslow, Thomas W. & Pindyck, Robert S., 1994. "Valuing flexibility in utility planning," The Electricity Journal, Elsevier, vol. 7(2), pages 60-65, March.
  7. Adam B. Jaffe & Karen Palmer, 1997. "Environmental Regulation And Innovation: A Panel Data Study," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 610-619, November.
  8. Parry, Ian & Pizer, William & Fischer, Carolyn, 2000. "How Important is Technological Innovation in Protecting the Environment?," Discussion Papers dp-00-15, Resources For the Future.
  9. Stavins, Robert & Whitehead, Bradley, 1996. "The Next Generation of Market-Based Environmental Policies," Discussion Papers dp-97-10, Resources For the Future.
  10. Ellerman, A. Denny & Montero, Juan-Pablo, 1998. "The Declining Trend in Sulfur Dioxide Emissions: Implications for Allowance Prices," Journal of Environmental Economics and Management, Elsevier, vol. 36(1), pages 26-45, July.
  11. Downing, Paul B. & White, Lawrence J., 1986. "Innovation in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 13(1), pages 18-29, March.
  12. Dallas Burtraw & Alan Krupnick & Erin Mansur & David Austin & Deirdre Farrell, 1998. "Costs And Benefits Of Reducing Air Pollutants Related To Acid Rain," Contemporary Economic Policy, Western Economic Association International, vol. 16(4), pages 379-400, October.
  13. Spulber, Daniel F., 1985. "Effluent regulation and long-run optimality," Journal of Environmental Economics and Management, Elsevier, vol. 12(2), pages 103-116, June.
  14. Stavins, Robert, 1998. "Market-Based Environmental Policies," Discussion Papers dp-98-26, Resources For the Future.
  15. Burtraw, Dallas & Krupnick, Alan & Austin, David & Farrell, Deirdre & Mansur, Erin, 1997. "The Costs and Benefits of Reducing Acid Rain," Discussion Papers dp-97-31-rev, Resources For the Future.
  16. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
  17. Johannesson, Magnus & Johansson, Per-Olov, 1996. "To Be, or Not to Be, That Is the Question: An Empirical Study of the WTP for an Increased Life Expectancy at an Advanced Age," Journal of Risk and Uncertainty, Springer, vol. 13(2), pages 163-74, September.
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Citations

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Cited by:
  1. Paul Lanoie & Jérémy Laurent‐Lucchetti & Nick Johnstone & Stefan Ambec, 2011. "Environmental Policy, Innovation and Performance: New Insights on the Porter Hypothesis," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(3), pages 803-842, 09.
  2. Burtraw, Dallas & Palmer, Karen & Krupnick, Alan & Evans, David & Toth, Russell, 2005. "Economics of Pollution Trading for SO2 and NOx," Discussion Papers dp-05-05, Resources For the Future.
  3. Ambec, S. & Garapin, A. & Muller, L. & Reynaud, A. & Sebi, C., 2013. "Comparing regulations to protect the commons: an experimental investigation," Working Papers 2013-07, Grenoble Applied Economics Laboratory (GAEL).
  4. Burtraw, Dallas, 2007. "State Efforts to Cap the Commons: Regulating Sources or Consumers?," Discussion Papers dp-07-49, Resources For the Future.
  5. MacGill, Iain & Outhred, Hugh & Nolles, Karel, 2006. "Some design lessons from market-based greenhouse gas regulation in the restructured Australian electricity industry," Energy Policy, Elsevier, vol. 34(1), pages 11-25, January.
  6. Paul Lanoie & Stefan Ambec & Iain Scott, 2007. "When and Why Does it Pay to be Green?," CIRANO Burgundy Reports 2007rb-03, CIRANO.
  7. Elbakidze, Levan & McCarl, Bruce A., 2007. "Sequestration offsets versus direct emission reductions: Consideration of environmental co-effects," Ecological Economics, Elsevier, vol. 60(3), pages 564-571, January.
  8. David Popp, 2003. "Pollution control innovations and the Clean Air Act of 1990," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 22(4), pages 641-660.
  9. Berry, David, 2002. "The market for tradable renewable energy credits," Ecological Economics, Elsevier, vol. 42(3), pages 369-379, September.
  10. Grover, David, 2013. "The ‘advancedness’ of knowledge in pollution-saving technological change with a qualitative application to SO2 cap and trade," Ecological Economics, Elsevier, vol. 89(C), pages 123-134.

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